Legal Definitions - balloon payment

A balloon payment is a single, unusually large payment made at the very end of a loan term. It is significantly larger than the regular, preceding payments and is designed to pay off the entire remaining principal balance of the loan.

Loans structured with a balloon payment, often called "balloon loans," typically feature lower monthly payments throughout most of the loan period. This can make the loan seem more affordable initially. However, borrowers must be prepared for the substantial final payment, which can be several times the amount of the regular monthly installments.

Here are some examples illustrating how balloon payments work:

• Commercial Real Estate Development: A property developer secures a two-year loan to purchase a plot of land for a new commercial building. For the first 23 months, they make relatively small, interest-only payments. In the 24th month, a final payment of $1.5 million is due, covering the entire remaining principal of the loan. The developer plans to either sell the developed property or secure long-term financing before this large payment is required.

  This illustrates a balloon payment because the final $1.5 million payment is disproportionately large compared to the preceding monthly payments, settling the substantial remaining balance of the land acquisition loan.

• Small Business Equipment Financing: A manufacturing company needs to purchase a new, expensive piece of machinery. They obtain a three-year loan with a balloon payment structure. For the first 35 months, they make manageable monthly payments of $2,000. In the 36th month, a final payment of $50,000 is due. The company anticipates increased revenue from the new machinery will allow them to make this final payment, or they may seek to refinance the remaining balance into a new loan.

  Here, the $50,000 payment at the end of the three-year term is a balloon payment because it is significantly larger than the regular $2,000 monthly payments and clears the outstanding debt on the equipment.

• High-Value Personal Asset Purchase: An individual purchases a private aircraft using a specialized five-year loan. To keep the monthly payments affordable, the loan is structured so that the first 59 payments are $3,500 each. However, the 60th and final payment is $120,000, covering the majority of the aircraft's purchase price. The buyer plans to sell an existing asset or secure new financing for the remaining balance before this large payment is due.

  This demonstrates a balloon payment as the final $120,000 payment is many times greater than the preceding regular monthly payments, serving to fully discharge the loan for the aircraft.